Foxconn unit FIH Mobile makes record loss in 2017

TAIPEI -- FIH Mobile, a unit of Hon Hai Precision Industry that makes Android phones, said on Thursday it made a record loss in 2017 due to poor-performing investments, higher costs for new businesses and a deteriorating margin.

The company attributed the record write-down of $525 million to a $200 million impairment loss from its investment in Indian e-commerce startup Snapdeal, costs incurred in the operation of a newly acquired Nokia phone business and declining margin as a result of price competition. FIH Mobile mainly manufactures handsets for smartphone makers such as Nokia, Xiaomi, Huawei, its affiliate Sharp and other Chinese brands.

The loss is the largest since the company listed in Hong Kong in 2005. Its parent, Hon Hai, is better known as Foxconn Technology Group.

FIH Mobile completed the purchase of Nokia's phone business and secured a license to use its branding rights, together with a Finnish partner HMD Global, from Microsoft at the end of 2016.

FIH Mobile Chief Executive Chih Yu-Yang said in a statement on Thursday that his company sees great challenges in operating and marketing its new Nokia phone business in 2018 as the industry faces a saturated smartphone market. The manufacturer also still sees downside risks in profit margin due to continuing price competition in the assembly of handsets, according to Chih.

The company's gross margin plunged to only 1.1% in 2017 from 5.5% in 2016 although its revenue increased 93.8% to $12.08 billion from 2016.

The poor earnings could ripple upward into its parent company and its subsidiaries, which together hold some 64% in FIH Mobile. Based on Foxconn's net profit of 148.66 billion New Taiwan dollars ($5.07 billion) for all of 2016, FIH Mobile's losses could reduce Foxconn's net income by some 6.6%. Foxconn has yet to announce its 2017 results.

Foxconn, a major iPhone assembler, counts Apple as its No. 1 customer that accounts for around 50% of its annual sales of NT$4.7 trillion in 2017.

On Thursday, China's regulator also approved Foxconn's application to list another subsidiary Foxconn Industrial Internet, or FII, on Shanghai's main board, just over a month after it applied for an initial public offering on Feb 1. The unusually speedy approval by China Securities Regulatory Commission came at a time when Beijing is luring high tech companies to list in the country and as China rolls out tax benefits and investment incentives to draw Taiwanese businesses over.

For Foxconn, the move to develop new Android smartphones under the Nokia brand and to spin off units are all part of its continuous efforts to diversify away from Apple, improve its racer-thin margin in assembling electronic products and to raise capital for future investment.

According to FII's filing, its net profit for 2017 was 15.86 billion yuan ($2.5 billion) on revenue of 354.5 billion yuan. Analysts estimate that the size of the IPO could reach 475.8 billion yuan based on forward price-to-earnings multiples of 30 times for tech stocks in China. That would be more valuable than Foxconn's market value of some NT$1.55 trillion in Taipei where stocks trade at an average of around 10 times forward P/E.

"It's not a bad idea for Foxconn to spin off some businesses to seek new capitals quickly through an IPO in China and such move could definitely help Foxconn secure more government subsidies from the mainland," said Kylie Huang, an analyst at Daiwa Capital Markets.

But for FIH Mobile, it is unlikely to see a recovery in its earnings as its investment in the Nokia business is still in the early stages, Huang said. She is also cautious about Foxconn's earnings outlook for 2018 due to lackluster demand for iPhone X in the near term. Foxconn could also lose new iPhone orders to smaller rivals such as Pegatron Corp. and Wistron Corp. in the second half of this year, she said.

FIH Mobile shares rose 1.4% to close at 2.19 Hong Kong dollars on Thursday, prior to the result announcement. However, the shares have fallen by 8% since the beginning of the year, while the benchmark Hang Seng index has gained 2.5% in the same period.

Foxconn shares edged 1.02% higher to close at NT$89.4 in Taipei. They have dropped nearly 6% so far this year.